TaxTMI 
TaxTMI 
2025 (12) TMI 13
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....vency and Bankruptcy Code, directing the erstwhile directors of Chamber Construction Pvt. Ltd. (CD) to contribute Rs. 36.53 crores to the Corporate Debtor's assets due to alleged fraudulent/wrongful trading. Contents of Appeal 2. Appellant in memo of appeal stated that the Corporate Debtor admitted into CIRP by Ld. NCLT order dated 16.07.2019, thereafter the RP sought liquidation of the CD, which remains pending before NCLT. Kotak Mahindra Bank assigned a debt receivable from Mafatlal Engineering Industries Ltd. (in liquidation since 30.09.1999 under Order of Hon'ble Bombay High Court) to Respondent No. 2 via Assignment Agreement dated 29.11.2011. Respondent No. 2 then executed an MOU dated 17.12.2011 with the Corporate Debtor to assign the Mafatlal debt (principal Rs. 15,34,49,940 with 12% interest) to the Corporate Debtor for a total purchase consideration of Rs. 36,90,00,000, of which 99% was payable by 28.11.2011 and 1% by 30.06.2013. The Official Liquidator of Mafatlal admitted a claim of Rs. 16,68,35,784 pursuant to Respondent No. 2's debt. 3. In the 7th COC meeting held on 31.08.2020, Appellant No. 2 informed the RP that the Corporate Debtor paid Rs. 38,19,05,000 to....
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.... that Kotak assigned a Mafatlal receivable to Respondent No. 2 on 29.11.2011 and 17.12.2011, Respondent No. 2 and the Corporate Debtor executed an MOU for assignment of this debt for Rs. 36.90 crore, against which the Corporate Debtor paid approximately Rs. 38.19 crore between 11.10.2011 and 07.01.2014, while the Mafatlal Official Liquidator admitted a related claim of about Rs. 16.68 crore. It is further stated that the MOU required 99% to be paid by 28.11.2011 which was a date preceding Respondent No. 2's own acquisition of this debt from Kotak (29.11.2011), suggesting pre-arrangement to siphon Corporate Debtor funds, before the asset was actually owned by the seller. 9. It is also stated that in terms of schedule 3 of the MOU dated 17.12.2011, 99% of the total consideration was to be paid by the CD on 28.11.2011 and admittedly the CD had made payment of Rs. 36,53,00,000/- on 28.11.2011 which constitutes 98.997% of the total consideration under the MOU i.e. Rs. 36.90 crores, prior to the date of MOU and even prior to the date of assignment of debt from Kotak to respondent No.2. Therefore, on the date of the execution of the MOU i.e. 17.12.2011, the Corporate Debtor was already....
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....ed 02.09.2021 and asserted that the Corporate Debtor's payments stood forfeited for non-payment of entire consideration under the MOU and also that Rs. 1,48,905/- is further recoverable from the CD. 16. It is further stated that directions may be passed against "any person" under Section Code 66 of the Code, including third parties who knowingly assist or benefit from offending transactions and in this regard the Adjudicating Authority has committed a mistake in not directing respondent No.2 to make appropriate contribution to the estate of the CD. Many precedents have been cited by the Respondent No.1 in its reply, which we will deal later on at an appropriate stage in this judgment. Reply by Respondent No.2 17. Respondent No. 2 i.e. Invent Assets Securitization and Reconstruction Pvt. Ltd. in its short reply as stated that Kotak Mahindra Bank had entered into an assignment agreement on 29.11.2011 with the Respondent No. 2 for the purpose of assigning the debt receivable under the credit facility availed by Mafatlal Engineering Industries Ltd. (Mafatlal) in favour of Respondent No. 2 and a Memorandum of Understanding (MoU) was executed on 17.12.2011 for assignment of the ....
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....the CD before and after the execution of MoU was also adjusted as per the understanding with the CD, towards the expenses, part handling charges and consultancy charges paid to savlani and investment trade and company and also to Morris energy ltd. and this position was clarified by the answering Respondent through its letters dated 09.11.2020, 26.02.2021 and 02.09.2021 addressed to the Respondent No. 1. 23. It is further stated that in total Respondent No. 2 has received a sum of Rs. 38,19,05000/- (Thirty-eight crores nineteen lakhs five thousand only) up to Rs. 07.01.2014 from the CD and after forfeiture of Rs. 33,30,00,000/- +Rs. 67,83,490/- incurred in part handling charges and payment of Rs. 4,22,70,415/-= Rs. 38,20,53,905/- were adjusted and in this way an amount of Rs. 1,48,905 (one lakh forty-eight thousand nine hundred and five only) was still recoverable from the CD which has been foregone by the Respondent. It is further stated that in realty an amount of only Rs. 76,77,497/- (Rs. Seventy-six lakhs seventy-seven thousand four hundred and ninety-seven only) was received by the Respondent No. 2 from the official liquidator of mafatlal and amount of Rs. 2 crores as alleg....
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....Mafatlal to Respondent No. 2 on 29.11.2011and Respondent No. 2 and the Corporate Debtor executed an MOU (17.12.2011) for assignment of this debt to the Corporate Debtor for Rs. 36.90 crore, the Corporate Debtor paid Rs. 38.19 crore between 11.10.2011 and 07.01.2014. The Liquidator of Mafatlal admitted a claim of about Rs. 16.68 crore on this receivable. Respondent No. 2 claimed adjustments for expenses, asserted that receipt from liquidator of Mafatlal was only about Rs. 0.77 crore (not Rs. 2 crore), and pleaded forfeiture of amount given by CD for non-payment of entire consideration and also that these are contractual disputes which could be addressed through specific performance/refund, not under Section 66. 30. It is further submitted that the order fastens liability on respondents (erstwhile directors) under Section 66, although Section 66(2) presupposes CIRP context and conduct of the directors of the company for acting in a fraudulent manner and also to act negligently while CIRP in contemplation in near future, while in 2011 there was neither default nor may be in contemplation of the appellants that CIR may be inflicted on CD and the Code was itself was not in force. ....
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....d Mittal & Anr., 2025 SCC OnLine NCLAT 1537 (relevant paras 41, 44): on director liability and Section 66 prerequisites. (IX) Venkatesan Sankaranarayanan, RP for RTIL Ltd v. Nitin Shambhukumar Kasliwal & Ors. (relevant paras 5-7): on look-back period and proof of intent for wrongful trading. (X) Sailesh Bhai Chandra Desai, Liquidator of EMI Transmission Ltd v. Sanjiv Sethi & Anr. (relevant para 13): on distinguishing civil disputes from fraudulent trading under IBC. Submissions of Ld. Counsel for Respondent No.1 34. Ld. counsel for the Respondent No. 1 (Liquidator) submits that there is no illegality in the impugned judgment as the "Mafatlal debt acquisition" by the CD is a collusive, non-ordinary course transaction engineered to divert funds from the Corporate Debtor, with built-in forfeiture and pre-acquisition payment terms in MOU that prejudiced creditors. 35. It is submitted that the transaction is such which may not be held in ordinary course as the Corporate Debtor is a real-estate company and not an NBFC/ARC and acquiring a third-party receivable (Mafatlal) was outside its usual business and commercially inexplicable, in the back ground that Mafat....
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....and lacked valuation discipline, and was grossly disproportionate to the Mafatlal debt's admitted value i.e. about Rs. 15.34 crore versus the Rs. 36.90 crore price agreed upon by the CD, which clearly indicates a non-commercial fraudulent motive harmful to the creditors of CD. 39. Ld. counsel for the Liquidator also submits that under Section 66 directions may be passed against "any person" carrying on the CD's business for fraudulent purposes, including third parties who knowingly assist or benefit from offending transactions; reliance in this regard is placed on Royal India Corporation Ltd. v. Mr. Nandkishor Vishnupant Deshpande (RP) and Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., emphasising that action under Section 66(1) of the Code may extend beyond directors where collusion is shown. 40. Ld. counsel for the liquidator submits that the Schedule 3 of the MOU demanded 99% payment by 28.11.2011 and the CD had already paid Rs. 36.53 crore by then which is prior to both the dates I.e. MOU execution and Respondent No. 2's acquisition of the debt, which shows pre-fixed movement of funds and conscious acceptance of forfeiture by having a "no recourse & forfeiture" cl....
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....to carrying on the business so as to defraud creditors, not just directors. II. Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 to highlight that beneficiaries may also be targeted. III. Mr. Tenny Jose & Ors. v. Prathap Pilai, RP of Tenny Jose Limited (NCLAT Chennai): in order to highlight the third-party liability where an "other entity" knowingly assists and benefits from offending business. Submissions of Ld. Counsel for respondent No.2 46. Ld. Counsel for Respondent No. 2 has confined his submissions only with regard to the NCLT's observations in the impugned judgment labelling the MOU with the Corporate Debtor as a sham and to set aside any avoidance of that MOU. It is submitted that the deal entered into between the parties was a bona fide, arm's-length assignment arrangement whose non-completion arose from the Corporate Debtor's own default under agreed timelines and forfeiture terms and the jurisdiction and scope under Section 66 targets only fraudulent/wrongful trading and personal liability; it does not empower avoidance of concluded contracts, which is governed by Chapter III of the IBC (Sections 43-51), therefore declaring....
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.... insolvency fora cannot disturb pre-CIRP contracts and cannot re-characterize commercial defaults as fraud. II. Sangeeta Jatinder Mehta & Anr. v. Kailash Shah, RP of New Empire Textile Processor Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 104 of 2024 (paras 9, 12) cited to highlight strict ingredients of Section 66 and need to establish clear fraudulent intent. III. Sudipa Nath v. Union of India, 2023 SCC OnLine Tri 79 (para 19): cited on statutory construction limiting adjudicatory overreach and preserving civil court domains. Analysis and Findings 53. Having heard learned counsel for the parties and having perused the impugned order dated 07.05.2024 passed by the Adjudicating Authority, the pleadings, documentary record, and written submissions of Respondent No. 1 (Liquidator), Respondent No. 2, we are of the view that before proceeding further we should have a look on the law on the subject which has been relied on by the parties. 54. This appellate tribunal in Swapan Kumar Saha v. Ashok Kumar Agarwal, (2025) ibclaw.in 911 NCLAT, while considering many cases, including those relied on by Ld. counsel for the appellants, held as under: "28......
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.... the assets of the Corporate Debtor. This requires us to examine: i. Whether there was an intent to defraud; and ii. Whether the Appellant was a knowing party to such conduct." Therefore, instead of supporting this case of the Appellant, the judgement supports the case of the Respondent- Liquidator. " 47. The Respondent also places reliance of the decision of this Appellate Tribunal in Sangeeta Jatinder Mehta and Anr. v. Kailash Shah RP of New Empire Textile Processor Private Limited [CA(AT)(INS) 104 of 2024] wherein the Bench has held, "7. Section 66, sub-section (1) provides that if it is found that any business of the Corporaicating Authority may on the application of the RP pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit." 48. Finally, reliance is also placed by the Appellant on the decision of this Appellate Tribunal in Renuka Devi Rangaswamy, Interim Resolution Professional of M/s. Regen Infrastructure Services Pvt. Ltd. v. Madhusudan Khemka, Suspended Director of M....
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....ourt again in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd., (2025) 256 Comp Cas 707: 2025 SCC Online SC 690 held as under: "60. However, in cases of "fraudulent or wrongful trading" in respect of the business of the CD as contemplated in section 66, the properties and the persons involved may or may not be ascertainable and therefore the Adjudicating Authority is not empowered to pass orders to avoid or set aside such transactions, but is empowered to pass orders to the effect that any persons, who were knowingly parties to the carrying on of business in such manner, shall be liable to make such contributions to the assets of the CD, as it may deem fit. The Adjudicating Authority in such applications may also direct that the director of the CD shall be liable to make such contribution to the assets of the CD as it may deem fit, as contemplated in section 66(2). In case of fraudulent trading or wrongful trading, it would be a matter of inquiry to be made by the Adjudicating Authority as to whether the business of the CD was carried on with intent to defraud creditors of the CD or was carried on for any fraudulent purpose." 58. Thus the factual mat....
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.... has been foregone. 61. It is also evident that the RP wrote a letter dated 06.02.2021 to Respondent No.2 objecting to non-execution of the MOU and appropriation of sums from the Mafatlal. Respondent No. 2 however replied on 26.02.2021. RP wrote another letter dated 21.08.2021 demanding execution of the Deed of Assignment and refund of Rs. 3,29,05,000. Respondent No. 2's however replied vide reply dated 02.09.2021 and asserted that the Corporate Debtor's payments stood forfeited for non-payment of entire consideration under the MOU and thereafter the RP thereafter filed has filed application under Section 66 of the Code. 62. Thus there are certain facts of this case which are not disputed. (i) It is not disputed that Kotak Mahindra bank sold a debt owed by Mafatlal Engineering (already in court-run liquidation) to Respondent No. 2 on 29.11.2011 (principal Rs. 15,34,49,940 with 12% interest). In this way Respondent No. 2 i.e. Invent Assets Securitization and Reconstruction Pvt. Ltd. bought the right to collect money from Mafatlal. (ii) The Official Liquidator of Mafatlal admitted a claim of Rs. 16,68,35,784 pursuant to Respondent No. 2's debt. (iii) ....
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....time, the payments made by it stood forfeited. Some money, which according to Respondent No.1 is Rs. 2 crores and according to Respondent No.2 is only Rs. 7677497/- (Rs. Seventy-six lakhs seventy-seven thousand four hundred and ninety-seven only) was also received from Mafatlal's Official Liquidator, which has also been kept by Respondent No. 2. 63. Above undisputed facts would sufficiently demonstrate that Kotak Mahindra bank sold a debt owed by Mafatlal Engineering, which was already in court-run liquidation, to Respondent No. 2 on 29.11.2011 and this amount was Rs. 15,34,49,940 principal with 12% interest. Respondent No. 2 executed an MOU on 17.12.2011 with the Corporate Debtor to assign the Mafatlal debt (principal Rs. 15,34,49,940 with 12% interest) to the Corporate Debtor for a total purchase consideration of Rs. 36,90,00,000, of which 99% was payable by 28.11.2011 and 1% by 30.06.2013. Significantly the Official Liquidator of Mafatlal had admitted the claim of Rs. 16,68,35,784/- only, with regard to this debt. This fact alone makes this transaction highly doubtful and unusual and against all commercial wisdom and common sense. 64. So much so the MOU entered into on 17.....
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....ansaction has taken place in the year 2011 while the CIRP against the CD was initiated on 16.07.2019 therefore at that time there may not be any contemplation in the mind of the appellants that the company may go in insolvency as otherwise also the CD was performing excellently in the year 2011. 69. We do not find any substance in the submissions made by Ld. Counsel for the Respondent no. 2, for the reason that the legislature in its wisdom consciously, has not provided any look back period for fraudulent transactions and thus it would not be justified by this Tribunal to supplement the words in a statutory provision which has not been deliberately enacted by the legislature. The legislature has intentionally kept no look back period for fraudulent transactions and the time gap between the transaction and CIRP, in our understanding is meaningless, if the transaction appears to be fraudulent. Once a transaction has been held to a fraudulent transaction there is no limitation to look back if the other ingredients of Section 66 (1) of the Code are satisfied. 70. We are of considered view that the impugned transaction is a fraudulent transaction entered into by the appellants wit....
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....is fraudulent or wrongful. Secondly section 66(1) contemplates an application thereunder only by the resolution professional and by none other. Thirdly section 66 (1) also restricts the power of NCLT subject to being satisfy with pre-requisite that any business of the corporate debtor has been carried on with intent to defraud creditors or the corporate debtors or for any fraudulent purpose and if satisfied it powers to pass an order is only against such person who are responsible for the conduct of such fraudulent business of the corporate debtor with mens rea to make them personally liable to make such contributions to the assets of the corporate debtor as it may deem fit." 12. The present is a case where Adjudicating Authority has also held that payments of consultancy charges to the Appellants is fraudulent and in exercise of power under Section 66(1) has directed the said contribution void. We, however, relying on the judgment of Tripura High Court in Smt. Sudipa Nath agree with the submission of the Appellant that Adjudicating Authority could not have declared the Sale Deed in favour of the Appellants dated 21.08.2017, as void. As observed above, the Sale Deed was ob....
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....rties and on consideration of the materials on record, the following points arise for determination: (a) Whether the company petition, decided in favour of the appellant by the National Company Law Tribunal, was maintainable under sections 397 and 398 of the Companies Act, 1956? (b) Assuming that the company petition was maintainable, whether the National Company Law Tribunal had jurisdiction to decide whether the gift deed is valid or not? (c) If the answer to the above question is in the affirmative, were the facts on record and the law such as to support the finding of the National Company Law Tribunal that the gift deed is invalid? (d) Whether the appellant was able to prove that she has been a victim of mismanagement and oppression by the directors of the company? Analysis maintainability". (Emphasis Ours) 77. Point no. 3, mentioned above, is relevant for our consideration and the same has been answered by the Hon'ble Supreme Court, in paragraph no. 30 and 31 as under: - "30. The aforesaid decisions confirm the view that the National Company Law Tribunal/Company Law Board possess a wide jurisdiction to decide all such matt....